The rating reflects our conviction that Aviva Investors Australia Ltd. has a strong ability to operate the SMA platform and deliver on its strategic objective of providing a highly cost-competitive SMA model portfolio offering. 

DSMA is actually an SMA administration service for separately managed accounts rather than a platform in the conventional sense. It provides retail investors with highly cost-competitive access to the portfolio manager’s model portfolios—Aviva Investors Core Opportunities and Aviva Investors Dividend Builder. 

S&P Fund Services analyst Rodney Lay said: “In our view, the service delivers on the manager’s objective and it is convenient for advisers with its direct data feeds into the largest adviser software applications, namely XPLAN, VisiPlan, and COIN.” 

The one material change since our previous review is the change in ownership of Aviva Investors Australia, which was acquired by a National Australia Bank (NAB) subsidiary in October 2011. Based on discussions with management, we believe the risk that the service will be discontinued at some future point is extremely remote based on NAB’s early indications of support, the autonomous nature in which the manager is operating post the NAB acquisition, and the service’s strategic fit within NAB.

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The rating reflects a combination of very low direct and indirect costs, a highly liquid secondary market, a simple and transparent portfolio-construction approach and historical performance that has been very true to style. 

The manager State Street Global Advisors Australia Ltd. designed the exchange-traded fund (ETF) product to closely track the returns of the S&P/ASX 200 Accumulation Index. Specifically, consistent with this objective, STW uses a full-replication portfolio-construction method, with the fund holding each of the 200 constituents stocks of the benchmark at market weight. 

Additionally, STW has proven, and will likely to continue to be, a highly tax-efficient investment vehicle. In a comparative sense, it may generate superior after-tax returns for investors with anything other than a zero percent marginal tax rate. 

S&P Fund Services analyst Rodney Lay said: “STW represents a highly efficient vehicle to gain exposure to the broader Australian equities market, and it is the only domestically listed ETF that provides exposure to the S&P/ASX 200 Accumulation Index”.

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Liquid Lifetime is a lifetime annuity that provides a guaranteed regular income for the rest of the investor’s life and, if selected, the lifetime of a second person (subject to the counterparty risk of the issuer, Challenger Life Company Ltd). The income payment amount is set at the issue date of each policy, and increases annually in line with the consumer price index. The income rate is dependent on the age and gender of the policyholder(s) and the payout option selected. 

“Unlike a number of alternative retirement solutions issued domestically over the past 36 months or so, Liquid Lifetime offers investors income certainty and the certainty that income payments will keep pace with inflation. Based on our analysis, we believe it can also provide a superior expected income profile in most market scenarios with a lower degree of risk,” said S&P Fund Services analyst, Rodney Lay. 

However, Mr Lay added “In the event of death, or if an investor chooses to withdraw early, Liquid Lifetime will only have a commutation value in the first 15 years. This is in contrast to a number of the recently issued retirement solutions. In our view, Liquid Lifetime may not be appropriate for funds that retirees may wish to bequest to their children or estate. We view Liquid Lifetime as a solid expense-requirement solution, well suited to meeting a retiree’s basic living expenses for the rest of their life. Given the very long-term nature of the investment, investors should be comfortable with Challenger Life Company Ltd’s credit risk.”

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The Spectrum product comprises three separate equity-linked investment strategies that offer the potential of capital growth and, in the case of the first strategy, income as well. All three provide the safeguard of 100% capital protection at the end of the 5.5-year investment term. 

S&P fund analyst Rodney Lay said: “Strategy 1 sits as a possible fixed-income alternative for suitable investors. In our view, the expected return (7.3% p.a., based on a Monte Carlo analysis undertaken by S&P) and the upside risk (40% of outcomes recorded the maximum return of 11.3% p.a.) make this a competitive offering relative to the comparable alternative, a five-year term deposit returning 6%”. The strategy is designed for investors seeking a fixed-income return but who are prepared to forgo a degree of fixed income in exchange for equity market upside risk. 

“Strategy 2 will outperform domestic equities in negative to subdued growth environments. It is designed for investors who believe that the outlook is for a more subdued growth and/or a highly volatile market,” said Mr. Lay. Similar to Strategy 1 a high percentage of outcomes (40%) recorded the maximum possible return of 11.5% p.a., according to a Monte Carlo analysis undertaken by S&P. 

Strategy 3 is suitable for those seeking exposure to international equities but with downside protection.

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We upgraded the Dalton Nicol Reid Australian Equity High Conviction Portfolio to four stars and downgraded the MCPM Core Australian Equity SMA to three stars. At the same time, we affirmed our ratings on 10 funds.

Standard & Poor’s Fund Services analyst Rodney Lay said: “Since our inaugural SMA sector review in 2010, the SMA sector has continued to grow, specifically by funds inflow, number of managers, the variation of investment strategies, and platform availability”.

“The sector continues to be characterised by concentrated, low portfolio turnover portfolios with predominantly large- to mid-market capitalisation stocks. This is partly a reflection of investor preference, which in turn partly stems from the visibility of the constituent stocks of an SMA portfolio. Investors have a preference for stocks they know and understand (generally larger market capitalisation stocks) and low turnover as it conveys the perception to many investors that the investment manager has a greater degree of conviction in their stock picks,” said Mr. Lay.

On the whole, the management of the model portfolios has improved as managers that we may have previously criticised have implemented improved processes. Specifically, the timeliness in which investment decisions are communicated to the various SMA platforms has improved. Similarly, the internal measurement of performance by the investment manager and the reconciliation with the actual performance of their model portfolios on each platform, so as to identify and address relative performance drift, has also improved.

“As a consequence of these improvements, what we refer to as SMA-specific risks, namely tracking error and relative performance risk between the SMA product on the platforms and the managers’ internal/unit trust equivalent has declined. We noted that the variation in performance between the SMA model portfolios and the unit trust version of the same investment strategy was generally negligible,” said Mr. Lay.

S&P Fund Services continues to view SMAs as an efficient access mechanism to managers’ investment strategies, providing stock, taxation, and cash flow visibility and providing a more efficient taxation structure for investors.

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